Preparing Your Business for Sale
 
 
Selling a business is an important decision with life changing implications which include financial, lifestyle and emotional consequences. The reason for selling a business is usually a combination of many issues such as retirement, new opportunities, lack of time and resources to continue, health reasons, or simply to change and pursue a new career that offers new excitement and interest. Whatever prompts the decision, the sooner the owner begins to prepare the business for sale, the more likely the sale will yield better results, suffer less complications and have a smoother transition to a new owner. Preparing the financial presentation of the business to illustrate the revenues, expenses, assets and liabilities and is time well spent. Advance preparation will go a long way to help potential buyers see the value of the business clearly and is an opportunity to clear up any potential problem areas before any negotiations begin. Good financial preparation will also help to establish the value of the business and the justification of an asking price for the business. Advance preparation will also help to put non financial areas into order and help prepare for buyer questions and concerns. Some common initial buyer questions and concerns are Why is the business for sale? Is this a safe investment? How much does the business make? What happens to the business when the prior owner is gone? Will I be able to run this business as well as the prior owner? What is the potential to grow the business? Why is the price so high? What is the price based on? Without clear answers to these types of questions the buyer will be suspicious, uncomfortable and the sale will be difficult if not impossible. Sunbelt Business brokers can help in this process and thus let the business owner stay focused on the momentum of the business. This helps to avoid potential loss of business if the owner’s time becomes consumed with preparing the business for sale, finding potential buyers and going through the many negotiations necessary to find the right buyer and close a sale for the business. Many times there will 10 - 20 buyer engagements (before a sale is completed) and 3 - 5 failed offers and each buyer will have their own criteria and ways to justify the value of their investment. Having a well prepared presentation of the business and a clear financial picture will help save time and maximize the value obtained for the business. This will also help in the structuring of financing of the purchase and help the buyer to better present the opportunity to the bank, other investors, and any legal and counting advisors. Another area to consider will be what type of sale? Will the transition be an “asset sale” or a “share sale” and what, if any, tax implications of the sale will there be. This may affect the price implications for both the buyer and the seller. In Canada most small business are sold as an asset sale to avoid liability issues by the new owner and to gain tax advantages for the purchase of the assets. However each case is unique and professional advise from a legal and accounting professional is always recommended. See also Pros and Cons / Share Sale or Asset Sale of a Business? Selling a business takes time, in Canada it may take 7-9 months on average, and even longer if the market of suitable buyers is limited. Many businesses take over a year to sell and can go through many negotiations and near miss situations that can be extremely frustrating for the owner and have a negative affect on the business if the owner loses focus on the normal operations of the business while going the this process. It is estimated by the International Business Brokers Association (IBBA) that businesses sell 35% faster when there is a professional business valuation prepared in advance of selling a business. Fair Market Value “According to the principle of substitution, the value of a business tends to be determined by the cost of acquiring an equally desirable substitute”. There are many different formulas and methods for valuing a business, and three popular methods used by many business advisors are are as follows: Cost Approach - considers the cost of purchasing or reproducing the assets of the business. Income Approach - considers the recent financial performance, future projections, ROI / Cap rate, and multiples based on the industry and stability of the business. Market Data Approach - considers current sales in the marketplace for the same or similar types of business (comparable sales). There is no one single method that covers all situations and in fact it is good to value a business considering several different methods and use a weighted average of the maximum and minimum value ranges for all methodologies reviewed. For example a business with a large amount of inventory, large receivables, or that has other assets such as special equipment, patents, or real estate may be weighed more heavily by the value of the assets than the multiple of the income. That said t is always important to keep the income of the business in perspective since it is usually the income / cash flow that eventually pays for the assets. Ultimately it is the buyer who gets the final say on the value of a business since they vote with their dollars. So, for the seller, the better a business can be portrayed, presented and justified are all important factors that will help to gain the maximum investment from the buyer and simplify the process of negotiation and due diligence. Sunbelt Business Brokers offers several ways to help sellers package document and present a company for sale that include, Confidential Business Reviews CBR, Most Probable Selling Price MPSP, Limited Scope Valuations, and Full Scope Valuations to fit the needs of different sizes of businesses and to focus on the requirements of the business and the reason for the valuation. While most commonly, the valuation may be for the sale of the company, there are other circumstances such as partnership buyouts, succession transitions, bank and financial requirements that may make use of the business valuation and marketing reviews useful. In Montreal it would be my pleasure to meet any business owner and discuss the different options and prices for our marketing and valuation services. Please fell free to contact me at 514 966 4996 or by email at chilibeck@sunbelt-longueuil.com for more details and information. Thank you, Michael Chilibeck Sunbelt Business Advisor http://sunbelt-longueuil.com/news/News/News.htmlmailto:chilibeck@sunbelt-longueuil.comshapeimage_1_link_0shapeimage_1_link_1
Fair Market Value
 
“According to the principle of substitution, the value of a business tends to be determined by the cost of acquiring an equally desirable substitute”.
Friday, July 18, 2008
Preparing your business for sale